9/02/2003 @ 1:00PM

Home Builders Raise Roof On CEO Pay

The U.S. housing industry is showering its executives with huge pay packages just as economic signals are flashing that the industry is headed for a slowdown.

Last year, the median total compensation awarded a housing sector chief executive was $6.2 million, up 33% over 2001. Not exactly chicken feed. Top executives pulled down anywhere from $10.5 million to $26 million apiece.

Could housing stocks, up some 35% this year and at peak multiples, be headed for a fall? The big pay packages seem to suggest that. Recall all the fat pay packages paid to telecom and high-tech executives before those industries cratered in 1999-2000? (Housing executives, perhaps mindful of all those worthless dot-com options, are smartly taking a big chunk of their compensation as cash bonuses.)

There’s no disputing that the housing industry, buoyed by low interest rates and strong demand, enjoyed an earnings-per-share gain of 27%, while pretax income rose 24% in 2002. Some firms could have a repeat performance in 2003.

Home builders were among the most generous in awarding fat pay increases. Median compensation rose 43% over 2001 to $10 million, outpacing earnings per share (29%) and pretax income (31%). Meanwhile, the home builders’ median stock price increased a paltry 2% during 2002, Credit Suisse’s Zelman said.

CEO compensation for the building products group rose 42% to $6.5 million, while EPS and pretax income had median increases of less than half that figure, 16% for both, and the median stock price was up 1%.

The only exception was the home furnishings group. EPS increased by 41% while pre-tax income rose 17%, but median CEO compensation decreased 16% from $2.8 million to $2.4 million, and the median stock price for the group declined 17% from 2001.

The highest paid CEOs were among the home builders.
Ryland Group
‘s
Chad
Dreier
Chad Dreier
‘s total compensation rose 247% to $26 million,
KB Home
‘s
Bruce
Karatz
Bruce Karatz
increased 66% to $23.8 million and
Toll Brothers
‘
Robert
Toll
Robert Toll
‘s pay rose 63% to $16.7 million. (A Ryland spokesperson said Dreier’s 2002 compensation was distorted by a new five-year agreement he signed in 2002 awarding him $12 million in restricted stock that can’t be fully exercised for five years.)

If all this generosity makes you wary of investing in the housing sector, it should. Housing has been one of the U.S. economy’s lone bright spots. But indicators have been warning for months that this sector is headed for a correction.

Interest rates began rising after short-term rates hit a 45-year low in June. In July, the Commerce Department said new sales fell 2.9% from June to a seasonally adjusted annual rate of 1.165 million. New-home inventories increased 1.2% to 345,000 in June, up from 341,000 in April.

And building supply companies and furniture companies can’t be happy about the slowdown in existing-home sales. Inventory increased 5.9% in June to 2.5 million units from 2.36 million units in May. There is now 5.1 months of inventory waiting for resale.

Interest rates are probably the best indicator of home building stocks’ direction. During the past several years, low interest rates increased the affordability of housing, spurring buyers to buy bigger homes and existing homeowners to trade up. But the reverse is true as rates rise. Given the recent runup in stock prices, it’s a house of cards.